Financial Forecast 2010: The Future of the Property/Casualty

Insurance Industry

Property Casualty Insurers Association of AmericaExecutive Roundtable Seminar

Naples, FL

January 23, 2006

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

Crystal Ball: 2010

Financial Predictions

Slower Growth & Higher Losses =Disappointing Profits

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E

06F

07F

08F

09F

10F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2010F*

*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates.Source: Insurance Information Institute; Fortune for all industry figures

P/C profits continue to disappoint. ROE stuck at 9-10%

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

F20

07F

2008

F20

09F

2010

F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2005-10 figures are III forecasts/estimates.

2006-2010 (post-Katrina) period will resemble 1993-97

(post-Andrew)

2010: Leakage of P/C Insurance Premium Continues

• Large DeductiblesEfficient Use of Corporate CapitalMakes Sense for Personal Lines Policyholders

• Alternative Risk TransferEspecially Captives: Popular for Ever-Smaller RisksDedicated Reinsurance FacilitiesContingent Funding: Debt, Post-Event Assessments, Govt.SecuritizationDiversification in Portfolios of Asset-Backed SecuritiesSelf-InsuranceSelf Insurance GroupsRisk-Retention Groups

• Residual MarketsFL; Large Expansion in LA, MS, TX & Elsewhere

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 80 85 90 95 00 05E 10F

U.S. Policyholder Surplus: 1975-2005*

Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.

$ B

illio

ns

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity at year-end 2005 was $420 billion (est.). It will reach $500B by

2009 and $536 billion by year-end 2010

CAGR 1975-2005E = 10.7%

Assume CAGR 2005-2010 = 5%

Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)

$1,500

$38

$400$450$600

$710

$300$100$140

$600

$129$297

$620

$124$202$150$299

$490

$2,800

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.

As of Dec. 1, 19 insurers announced plans to raise

$9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65

billion more for a total of $18.65B. Likely at least $20B raised eventually.

Existing companies

will continue to find it

relatively easy to raise cash…

Announced Capital Raising by Insurance Start-Ups

($ Millions, as of December 11, 2006)

$1,500

$1,000$1,000$1,000$1,000

$750

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

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*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.

As of Dec. 11, 13 start-ups plan to raise as

much as $8.75 billion. More likely to come.

…so will start-ups

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$57.

7

$100

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*

20??

*Includes $53.7 billion per ISO/PCS plus $4B offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2005 will be by far the worst year ever for insured

catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

Points (Reduced)/Increased

0.5

(2.4)

5.26.3

3.52.5

1.91.1

(0.4)

0.4

-3-2-101234567

1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F

Combined Ratio:Impact of Reserve Changes (Points)

Source: ISO, A.M. Best, Lehman Brothers for years 2005E-2007F

Reserve adequacy is improving

substantially, which bodes well for 2010

Tort System Costs,2000-2010F

$179

$232$245

$262 $269$282 $283

$295$288$279

$206

1.83%2.03%

2.22% 2.23%2.24% 2.25% 2.20%2.20%2.21%2.27%2.23%

$100

$150

$200

$250

$300

$350

00 01 02 03 04 05E 06F 07F 08F 09F 10F

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.

After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing

Shareholder Class Action Lawsuits*

*Securities fraud suits filed in U.S. federal courts.**Suits of $100 million or more.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

164202

163

231188

109172

240203 214

497

272222 235

181

0

100

200

300

400

500

600

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

1997-2001 remain problematic from a D&O perspective Sarbanes-Oxley

Impact??

Regulatory Predictions

Congressional Apathy Continues on P/C Issues

Tough Road for Comprehensive National Catastrophe Plan

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

Federal Catastrophe Reinsurance Contract

Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event Unlikely National CAT Plan in place

by 2010. Major

obstacles include:

•Divisions within industry

•Opposition in Congress

TRIA’s Days Are Numbered: Congress & Administration Want it Dead

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

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Source: Insurance Information Institute

Obstacles Include•Opposition in Congress &

Administration•Profitability/Growth in Capital

Base/New Entry•Few examples of econ. disruption

ExtensionIndustry Aggregate Retention ($ Bns)

Status of Other RegulatoryIssues by 2010

• No Optional Federal Charter by 2010• Little Progress on Regulatory

Modernization (e.g., SMART Act)• Asbestos “Reform” Not to Industry

Satisfaction• Incremental Additional Improvements

in Tort Environment

Competitive Predictions

Wave of Consolidation Among Primary P/C Companies is Not

Imminent

M&A Activity AffectingPersonal Lines, 1992-2004 ($ Mill)

$14

$3,073

$6,790

$386

$24,108

$9,182

$2,367$66 $978

$72 $68

$7,860

$798

119

1315

24 23

1210

5

12

16

20

11

$0

$5,000

$10,000

$15,000

$20,000

$25,000

92 93 94 95 96 97 98 99 0 1 2 3 4

Val

ue o

f Dea

ls

0

5

10

15

20

25

30

Num

ber

of D

eals

Value of Deals Number Of Deals

Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005

M&A activity has been in the doldrums, no

obvious reason for surge in

consolidation, at least in personal lines, except via non-renewals

Commercial lines M&A slow due to

fear of “skeletons in

the closet”

Class of 2005:Many Will Be Gone by 2010

$1,500

$1,000$1,000$1,000$1,000

$750

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

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*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.

As of Dec. 11, 13 start-ups plan to raise as

much as $8.75 billion. More likely to come.

…so will start-ups

Walmarted: Retailers Will Eventually Show Interest in P/C Insurance

• Banks will continue to acquire distribution channels

• Retailers chafing to get into retail banking

• Insurance not far behind, at least on distribution side

Walmart shaking up warranty business

Retailing & Insurance have a long history.

Remember Sears and Allstate?

Political Predictions

Change is in the Air

2010: Political Order Will Be Shaken Up

• One House of Congress Changes Hands by 2010

• Change of Party in the White House

• Eliot Spitzer is the Next Governor of New York

Insurance Information Institute On-Line

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